Money could also be king, however it may well trigger complications if the taxman denies your claims

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Jamie Golombek: With no information, the burden of proof is actually larger as this ‘unbiased spirit’ from PEI came upon

Money might not all the time be the very best methodology of fee in relation to coping with the taxman. Photograph by Getty Photos

It’s usually stated that money is king, however it could not all the time be the very best methodology of fee in relation to coping with the taxman, who might ask you some powerful inquiries to justify tax-deductible bills or, on the flip aspect, exhibit you earned a minimal quantity of qualifying revenue to make the most of numerous advantages or credit.

For instance, there’s been a slew of latest instances coping with taxpayers’ eligibility for COVID-19-related advantages, such because the Canada Emergency Response Profit (CERB) and Canada Restoration Profit (CRB), through which taxpayers needed to show that they had earnings of a minimum of $5,000 to qualify for these advantages. If these earnings have been paid in money, and by no means deposited in a checking account, the validity of assorted taxpayers’ claims was challenged.

However the problem in proving money earnings may also come up exterior the realm of pandemic advantages. Take a latest case involving a taxpayer’s declare for the Working Earnings Tax Profit (WITB), since changed by the Canada Employees Profit (CWB). The profit is a refundable tax credit score that dietary supplements the earnings of low-income employees, and is on the market to people 19 years of age or older who aren’t in class full time.

For 2022, the CWB is the same as 27 per cent of every greenback of working revenue above $3,000, to a most credit score of $1,428 for single people with out dependents, and $2,461 for households ({couples} and single dad and mom). The CWB is phased out at a fee of 15 per cent of every greenback of revenue above $23,495 for single people (with out dependents), and $26,805 for households. (Be aware that quantities could also be totally different for residents of Alberta, Nunavut and Quebec.)

In 2018, about 1.4 million Canadians obtained the WITB. The important thing to qualifying for the WITB (or the CWB now) is that the person claiming the credit score will need to have “working revenue,” which is basically employment or enterprise revenue.

However how does one show working revenue should you’re paid completely in money?

That was the query earlier than the decide in a latest Tax Courtroom of Canada case involving a Prince Edward Island resident and his WITB declare for the 2015, 2016 and 2017 taxation years. The taxpayer’s claims have been denied as a result of the Canada Income Company concluded he “was not actively working a enterprise” and had “not earned any working revenue giving entitlement to the WITB.”

By the use of background, the taxpayer lives “very modestly” in a trailer along with his spouse and was described by the court docket as a person “gifted with an unbiased spirit.” All through his life, he has held numerous jobs, together with as a bar singer in Montreal, in addition to gigs in expertise and development and renovation.

In court docket, the taxpayer was represented by a childhood good friend, a tax specialist, who additionally ready his tax returns for the three years in query. His good friend additionally occurs to personal a number of properties, the place the taxpayer carried out every kind of labor, together with the renovation of bogs, set up of flooring, restore of flood injury and development of galleries and balconies, in addition to plumbing and electrical energy — in brief, something associated to renovation or upkeep.

Throughout the tax years in query, the taxpayer solely labored through the summer time so as to earn sufficient cash for him to spend the winter on a sailboat within the Bahamas. He didn’t want some huge cash as a result of he didn’t have any dependents and had only a few private bills. The annual bills for his sailboat amounted to $5,000. Every winter whereas on his boat, “it price him nothing to dwell. He ate what he caught,” and testified, “Life on the ocean shouldn’t be costly … To dwell on his sailboat … is … the absolute best life; it’s heaven on earth.”

In 2015, 2016 and 2017, the taxpayer declared enterprise revenue of solely $10,000 to $13,500, as a result of he was crusing for six months of the 12 months. He additionally didn’t incur, nor deduct, any enterprise bills, as his prospects purchased any essential constructing supplies.

His good friend paid him in money, however the taxpayer didn’t maintain any documentation of the revenue he earned or a register, though, in response to the decide, “he has since realized the significance of holding a file and preserving any supporting paperwork.” His good friend marked the work, or the quantities paid to the taxpayer, on a small calendar and, on the finish of the 12 months, did the accounting. The taxpayer didn’t deposit his revenue in his checking account, however claimed to have declared all his revenue to the CRA on his returns.

The CRA argued that the revenue the taxpayer declared was not associated to the operation of a enterprise or employment, as a result of he carried out a cash-only enterprise, stored no information, incurred no enterprise bills and produced no supporting paperwork to assist his claims. The taxpayer and his tax specialist good friend relied “virtually solely on their reminiscence, which is unreliable in nature.”

The decide acknowledged that “in a self-assessment system like we’ve in Canada, holding books and information is essential,” however the failure to maintain good information shouldn’t be, by itself, enough grounds to dismiss a case.

Absent good books and information, the burden of proof is actually larger and the decide should assess the credibility of the taxpayer and any witnesses, such because the tax specialist. As for working a money enterprise, the court docket cited prior jurisprudence which concluded: “Using money is authorized and bonafide … and it doesn’t essentially result in a conclusion of tax avoidance.”

The decide weighed all of the proof and was glad the revenue declared by the taxpayer through the years in query did, certainly, relate to the operation of a enterprise, was corroborated by his tax specialist and constituted working revenue. The decide, due to this fact, concluded the taxpayer was entitled to the WITB for the three years in query.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. [email protected]